The start of the “Caffeine rush”: Coca-Cola acquires Costa Coffee days after Nestlé-Starbucks deal

“There is no life before coffee”, a famous sentence says, giving some kind of indication on the size of two things: how difficult is to wake up every morning and the importance of the coffee industry. Last week will be remembered as a turning point in the history of the coffee industry in Europe and beyond, thanks to two ground-breaking deals by two gigantic players of the food/soft drinks industry.

The first breaking news of the week arrived last Tuesday, when a joint press release by Nestlé and Starbucks Corporation announced the two companies struck a deal granting Nestlé the perpetual rights to market Starbucks Consumer Packaged Goods and Foodservice products globally. Just a few days later, on August 31, the news that the Coca-Cola Company has agreed to buy coffee chain Costa for $5.1 billion (3.92 billion British pounds) including debt, became public. The two moves are destined to somehow change the face of the booming global coffee market, in a wider competition that many already call the “coffee war”.

Nestlé – Starbucks’ deal

Last Monday, the first rumours on a potential Nestlé-Starbucks licensing deal, for the Swiss food giant to market the US coffee maker’s packaged coffees and teas around the world, begun to circulate. On Tuesday, August 28, an official press release on Nestlé’s website framed the agreement. “Nestlé and Starbucks Corporation today announced the closing of the deal granting Nestlé the perpetual rights to market Starbucks Consumer Packaged Goods and Foodservice products globally, outside of the company’s coffee shops”, said the document.

“This partnership demonstrates our growth agenda in action, giving Nestlé an unparalleled position in the coffee business with a full suite of innovative brands. With Starbucks, Nescafé and Nespresso we bring together the world’s most iconic coffee brands,” said Mark Schneider, Nestlé’s CEO. “The outstanding collaboration between the two teams resulted in a swift completion of this agreement, which will pave the way to capture further growth opportunities”, he added.

Coca-Cola’s acquisition of Costa Coffee

Last Friday, another big news shook the markets as soft drinks giant Coca-Cola said it has agreed to buy British coffee chain Costa for $5.1 billion, in a bid to expand in the booming coffee industry and to follow on the heels of Starbucks and Nestlé. As suggested by a recent analysis by the Wall Street Journal, the move would mark the biggest brand acquisition in the history of Coca-Cola and it represents an open attempt to challenge coffee-giant Starbucks Corp – which has more than 27,000 cafes around the globe – on its playground.

Size of the business

Headquartered in Dunstable, Bedfordshire, UK, Costa Coffee was founded in London in 1971 by the Costa family as a wholesale operation supplying roasted coffee to caterers and specialist Italian coffee shops, and was then acquired by Whitbread in 1995. The company has currently got nearly 4,000 stores in 32 countries, including a growing presence in China, and will grant Coca-Cola a solid retail presence.

Coca-Cola has clearly explained this with an official press release last week. “Why acquiring Costa? because coffee helps us get into hot beverages. Coffee is one of the fastest-growing beverage categories in the world, at 6%”, Coca-Cola CEO James Quincey explained. “Today, with the growth in coffee and hot beverages, it’s more important than ever that Coca-Cola make a serious and significant investment in the category”, Mr. Quincey – a Briton himself who took over as Coke’s CEO in May 2017 – said. “Costa is a platform with a great supply chain in coffee, a world-class roastery, a strong retail presence and a vending system. Costa has strengths in many countries and in many key distribution channels of the coffee business”, Mr. Quincey also added.

Nestlé and the “Caffeine rush”

The moves by Nestlé and Coca-Cola are clearly well-designed steps towards a diversification of their core businesses. They are not isolated acts in what many already call the “coffee war”. Nestlé’s move is widely seen as a latest show of strength, aimed at strengthening the Swiss giant’s coffee portfolio in the North American premium roast and ground and portioned coffee business.

The agreement will indeed grant Nestlé perpetual rights to sell Starbucks-marked products such as Starbucks, Seattle’s Best Coffee and Teavana outside of the US company’s coffee shops, unlocking an expansion in North America, where Starbuck’s brand awareness is incredibly high, in the coffee sector. The operations will be led from Nestlé’s global headquarters in Vevey, canton of Vaud, Switzerland, with 500 Starbucks new employees in the United States and Europe joining the company.

Starbucks’ boost

Starbucks CEO Kevin Johnson sees a huge potential in the move, as he declared his firm is set for a major boost under the deal, for clear reasons. “Bringing together the world’s leading coffee retailer, the world’s largest food and beverage company, and the world’s largest and fast-growing installed base of at-home and single-serve coffee machines helps us amplify the Starbucks brand around the world while delivering long-term value creation for our shareholders,” Johnson said. With more than 25,000 stores around the globe, Starbucks is a premier roaster and retailer of specialty coffee in the world.

Coca-Cola’s vision

On Coca-Cola’s side, the move to acquire Costa is a clear act to diversify its portfolio shifting away from sugary sodas, as many soft-drink makers have been trying to do in the past years. Coffee is by all means an enormous single-piece business with many formats, with many other remarkably fragmented businesses inside. The growth in coffee and hot beverages it’s “more important than ever”, according to Mr. Quincey, and that’s why his company is making such a “serious and significant investment” in the category. Coca-Cola’s presence in the coffee market is still relatively small, which is something the company is trying to change once the transaction is completed.

Coca-Cola’s earnings have declined over the last five years from almost $14 billion (EBITDA) in 2013 to just under $9 billion in 2017. The trend is part of an overall decline of soft drinks consumption in the US, and hence the need of a redefinition of the company’s portfolio. Costa generated revenue of £1.3 billion ($1.69 billion) in the year ended March 1 and earnings before interest, taxes, depreciation and amortization of £238 million. By comparison Starbucks had $22.4 billion in revenue in its last fiscal year and Coca-Cola had $35.4 billion, the Wall Street Journal reports.

Next steps

According to the Wall Street Journal, the agreement is expected to be completed in the first half of 2019. The deal is subject to customary closing conditions, including antitrust approvals in the European Union and China. It will be particularly interesting to see whether EU regulators will pave the way to the finalisation of the transaction, with no additional scrutiny, or if a “bigger Coca-Cola” in Europe will wake Brussels’ watchdog up and deserve a proper investigation.